For those of you living in the US (not just US citizens) with foreign bank accounts, foreign securities accounts, ownership interests in foreign corporations, partnerships, or other foreign potentially income generating assets, you may have a reporting requirement on Form 8938 – Statement of Specified Foreign Financial Assets. Failure to report on this form carries with it significant penalties, so you want to be sure you are in compliance if you have assets of this type.

You may have heard about the Report of Foreign Bank and Financial Accounts (FBAR) which is currently filed on a Form FinCen 114 with the US Treasury Department (a few years ago the form was called a TD F-90-22.1) each year. That form received a lot of press a few years ago as some of the large banks overseas cooperated with the US government to release the names of account holders living in the US, and is also tied to some of the amnesty programs you may have read about. This often conjures up images of mutli-millionaires hiding money overseas to avoid paying US taxes. Although this may be a component of it, I can assure you that it touches “normal” people as well that just happened to have foreign accounts, perhaps from living in a foreign country years ago, and still have the account, or maybe just living in the US for a few years and on a US work visa.

If you are reading this article, and thinking, “I have never heard of this before,” you likely have a relatively easy solution for the FBAR that will not result in huge monetary fines. This often consists of filing amended tax returns for the past three open tax years to report any income generated on these accounts, and filing FBARs for the past six years. But you must do this before the IRS discovers it – so do not bury your head in the sand.

Whereas the FBAR can attribute its roots in the Bank Secrecy Act passed by Congress in 1970 and is filed separately from your tax returns with the US Treasury Department, the Form 8938 has only been around since 2011, and is filed as a form with your tax returns. The Form 8938 has different reporting requirements as well. Whereas the FBAR is focused on foreign bank and securities accounts whose aggregate value of all accounts exceeds $10,000 at any point during the year, the Form 8938 is broader and includes more foreign income generating assets, and is only required if the aggregate value at year end is over $50,000 or if the maximum value at any point during the year is over $75,000 for single and married filing separate filers or $100,000 at year end/$150,000 maximum value if married filing jointly.

Since the US taxes people residing in the US on worldwide income, (and so does California), the IRS wanted a way to ensure that the income from foreign accounts was being properly included on the US tax returns. The FBAR does not do this, so the 8938 was created.

Parts I and II of the Form 8938 are a summary of the various types of specified foreign financial assets that you are reporting. Part III is a cross-reference to the forms and line numbers in the tax return where any income generated by these assets is included. Part IV is a cross-reference to foreign assets whose detail is not reported on the 8938 itself, but on other form specifically designed for those types of assets. Parts V and VI are the specific details of each account listed in parts I and II, and include things like account numbers, addresses, amounts, foreign currency conversions, etc.

You can easily download the instructions to the Form 8938 online if you would like to learn more about the reporting requirements. Even if you do not have a Form 8938 or FBAR filing requirement, you are still required to report on your US tax returns any foreign income earned by the accounts. With many countries there are also tax treaties in place to prevent double taxation.

Please keep in mind, there are complex issues involved with these reportings, and depending on the assets, you may require the assistance of an accountant or attorney.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes. Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

In this issue, we are discussing Schedule B – Interest and Ordinary Dividends. Prior articles are republished on my website at www.tlongcpa.com/blog if you would like to catch up on our Back to Basics series on personal tax returns.

Interest you earn from the use of your money by others is reported in detail in Part I of Schedule B and then summarized on Line 8a of Form 1040. Interest is taxed as ordinary income depending on your tax bracket. The most common form is interest earned from your banks or investment companies. You will generally receive a Form 1099-INT telling you the amount you paid if the amount is over $10. If it is under $10, there is no requirement for the payor to go through the hassle to report it to you and the IRS; technically that does not alleviate your responsibility to report it on your tax returns, however. This holds true for all IRS reportings. Some people think if no tax document is received, they are somehow relieved from the responsibility to report. This is an incorrect notion.

Other forms of interest to report on Schedule B could be interest earned from personal loans made to friends or family, or loans made to a business. In practice, you often will not receive a 1099-INT from individuals you loan money to, but they actually have the same requirements as a bank to file a 1099-INT for interest they pay to you, and they could be penalized for not doing so.

Another form of interest you need to report on Schedule B is interest earned from a seller-financed mortgage. If you sold your home and carried back a note on the house from the buyer, the interest they pay you is reportable interest on Schedule B. You are required to track the interest and report it properly. You and the buyer are both required to provide your names, Social Security numbers, and addresses to each other for proper tax reporting and matching. You list the buyer’s information in Part I of Schedule B next to the amount they paid you. A buyer will do the same for reporting the mortgage interest on Schedule A. A Form W-9 is the best document to request and provide Social Security Numbers. Buyers and sellers could each be penalized if they fail to provide their Social Security numbers for this purpose or if they simply get it verbally, and it is incorrect. A W-9 signed by the other party is a protection to you.

Be careful to not include any tax-exempt interest such as from U.S. Treasury Bonds or tax-free municipal bonds on Schedule B. These would be reported on Line 8b of Form 1040 and are generally not taxable unless there are other adjustments such as those made for Alternative Minimum Tax on Form 6251. Another source of interest to avoid reporting on your Schedule B is interest earned from investments in your retirement plan (I have see people make this mistake!).

There are other forms of interest or adjustments such as original issue discounts, private activity bond interest, amortizable bond premiums, and nominee distributions which are beyond the scope of this article.

Dividends are reported in detail in Part II of Schedule B and summarized on Line 9a of Form 1040. Dividends are essentially a return of part of the profits of the business to the owners. When you own shares of stock in a company, for instance, they may pay out a certain amount per share if the company is doing well. You can reinvest the dividends and buy more shares or take the cash. Either way, the dividends get reported on Schedule B.

Dividends are taxed at your ordinary income tax bracket rate unless they qualify for special capital gains rate treatment. Then they are called qualified dividends. To qualify for special treatment the dividends must be from U.S. corporations, corporations set up in U.S. Possessions, or in foreign countries with certain tax treaty benefits, or if readily tradable on U.S. stock exchanges. If you have held the stock for less than a year, there are also some specific holding period requirements that could still allow the stock to qualify.

The portion of ordinary dividends that are considered qualified are reported on Line 9b of Form 1040, and don’t actually show up on the Schedule B. This is a large advantage as people in the 10 percent or 15 percent income tax bracket pay no tax on capital gains and qualified dividends! People in the top 39.6 percent bracket pay a 20 percent rate on qualified dividends and everyone in between pays 15 percent.

Part III of Schedule B consists of questions about any foreign accounts or trusts you own or have signature authority over. These questions are EXTREMELY important to answer correctly. If you have a foreign account you will also need to file FinCen Form 114 with the Treasury Department. There are potentially massive penalties for failure to properly report on FinCen Form 114, even if unintentional, and possible jail time if you willfully do not report. You may also need to file a Form 8938, a 3520 or other forms related to foreign assets. If you have foreign assets, you should seek professional support that has experience in this area. Getting caught is much worse than coming forward.

In two weeks we will continue our Back to Basics series with Schedule C – Profit or Loss from Business

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

My grandfather’s sister once had the opportunity to go toe-to-toe with the 1920s gangster, Al Capone…or so goes the family story. She had ordered a fancy car and Capone sent a couple of his henchmen to convince her that she should allow him to purchase it since he did not want to wait for another one to be built. She politely refused, at which point, they said Mr. Capone would like to talk with her in person. So she drove to his place in Palm Island, Florida to meet the notorious gangster. She was a rather outspoken individual, and managed to come out with her car, and did not even have to dodge bullets on the way past the front gate! Most people know the interesting story about Al Capone is that the Feds could never get him for bootlegging, racketeering, prostitution, or murder, but they nailed him for tax evasion and failure to file tax returns!

Fast-forward the better part of a century and we are battling terrorism. Sometimes it is difficult to prove that a particular individual was involved in an act of terrorism, but there may be other ways to get them. How about the failure to report foreign accounts or even having signature authority over foreign accounts while residing in the United States?

Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts is required to be filled out each year for anyone that has bank or financial accounts (or is an eligible signer on someone else’s foreign accounts) that were established in a foreign country that aggregate $10,000 or more. The form is due to the Treasury Department each year by June 30th (one month away). Note this form does not go with your tax returns to the IRS. The IRS has its own two-year old Form 8938 Statement of Specified Foreign Financial Assets which is more geared towards tax evasion and is filed with your returns. It covers some additional assets and has different reporting thresholds, so you and your tax professional should review that as well.

The penalties for failure to file Form TD F 90-22.1 can be pretty sickening. Willful neglect to file the form is punishable with civil and/or criminal penalties. Civil penalties could be the greater of $100,000 or half of the account value. Criminal penalties could be $250,000 plus five years in prison, or $500,000 and 10 years in prison if you are also violating another law simultaneously. Even non-willful neglect (a.k.a. – your ignorance) carries a penalty of up to $10,000. These are also applicable per year you fail to report!

The IRS was recently seeking six years in prison for a 79 year-old widow in Palm Beach, FL for such issues and related failure to report the income from foreign accounts. I think the key is to just make sure you file the forms as needed, and have a discussion with your tax professional or an attorney if you are unclear if your assets qualify you to file these forms.

Oh, and if you happen to know any terrorists that need to file, please don’t forward my contact information…

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Various reasons including the fight against terrorism and failure to pay tax on foreign income are driving our lawmakers to require more stringent reporting of foreign investment activities. This is important because there have been significant changes in the past two years with the addition of a new reporting form, and the penalties for noncompliance include extremely high monetary penalties or jail time. Even cases of non-willful neglect or ignorance could lead to penalties of $10,000.

Generally this affects people who have opened bank or investment accounts in other countries (or are authorized signers on such accounts) or have an ownership interest in businesses in foreign countries. It generally does not include direct holdings of real estate, personal property, or financial investments made through an account setup here in the U.S. with a U.S. institution that diversifies your money and invests internationally. For instance, holding an international stock index fund through Vanguard would not trigger a requirement because Vanguard has reporting requirements here in the U.S. that would cover you. This additional reporting generally covers the things for which the U.S. would not know about unless you told them.

There are two forms which I feel tax practitioners should touch base with their clients about every year. One is the Foreign Bank and Financial Accounts Form TD F 90-22.1 (FBAR), and the other is the relatively new Statement of Specified Foreign Financial Assets Form 8938 which has only been around for about two years. The FBAR is not a tax return filing document, but is due to the Treasury Department by June 30th of each year (watch out if you are on extension and do your taxes late in the year). The new Form 8938 gets filed with your tax returns.

I suggest you think about any connections you have with money or assets in a foreign country and discuss them with your tax professional this coming year. The laws do get complicated and sometimes you may not think you have a reporting requirement when you actually do. For instance, you would have a reporting requirement if you have a relative or friend in a foreign country that adds you on to their bank account as a signer, simply for the convenience that you could write a check on their behalf if needed, regardless of whether or not you actually do.

You may have a reporting requirement if a foreign relative or friend has named you as a beneficiary in his or her trust; or perhaps you have a pension or deferred compensation plan which you will someday receive for past service with a foreign company or country; or maybe you are an owner or a partner in a business that holds assets that qualify (indirect interest). As you can see, it is not always straight-forward, but I hope you are now more alert to the issue, and that you can identify situations that may need further review.

Seeking qualified professional help continues to grow in importance as we continue to move in a direction towards increased complexity.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.